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  1. #21
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    Problem Part 5 (DRWT September 2006 proposal)

    The share price was $US37.99 and the exchange rate is $1US=65.75c at the start of FY2005. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c

    During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
    These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:

    Div payment date 1: 6th August 2004; $NZ1=US64.47c
    Div payment date 2: 5th November 2004; $NZ1=US69.05c
    Div payment date 3: 4th February 2005; $NZ1=US71.02c

    Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?

    'Deemed assessable income' is the maximum of either (a) the dividend income or (b) the amount calculated using the capital appreciation formula

    (a) Total dividend income, including all withholding tax is:
    (20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

    (b) Wealth tax due is: 0.03x½{(A+A1)+(B-B1)}
    0.03x½{(200x51.50)/0.7070 + (200x37.99)/0.6575} = $NZ391.87

    Clearly (b) is larger than (a), so the dividends received are not enough to offset our wealth tax liability. That means $NZ391.87 becomes our 'deemed assessable income'.

    Based on at tax rate of 33%, ‘I’s tax liability is:

    0.33 x $NZ391.87= $NZ129.32

    However, some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:

    (3/0.6447 + 3/0.6905 + 3/0.7102)= $NZ13.22

    That leaves the net amount of tax to pay as:

    $NZ129.32-$NZ13.22=$NZ116.10

    (end of second method example)

    SNOOPY

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  2. #22
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    quote:Originally posted by aspex

    Snoopy,
    All of your good work shows without a doubt that average taxpayer is out of his/her depth.
    Certainly with the Price Waterhouse Coopers proposal they should not be. For sure some may be confused with some of the mathematical notation I use. But if you keep in mind the general principle which is:

    1/ Value your holding at the start of the Year.
    2/ Value your holding at the end of the year.
    3/ Take the average of 1 and 2.
    4/ Pay tax on that amount EXCEPT if you have already paid tax on dividends greater than this amount then you don't have to do anything.

    That shouldn't be too daunting for taxpayers should it? I know that some people can't think in mathematical equations (fortunately I can) . But whichever you want to think of it, all I am doing is following the four steps above. -even if it *looks* more complex than that at a casual glance!

    quote:
    Anyway, it looks more likely that a compromise and "simple" system could eventuate.
    Don't automatically embrace the devil that you don't know!

    SNOOPY

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  3. #23
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    Here is the post that you have all been waiting for. The 'summary' post that lets you see the effect of the Price Waterhouse Coopers proposal stacked up side by side against the Cullen/Dunne legislative proposal, in the special but not atypical case of this particular YUM shares example.



    If you look at the light blue bars, they show the actual tax payable each year. If you look at the 'total' column, you can see that the total tax paid to the government is about the same under each proposal.

    There are some differences in the timing of the tax downpayments, most pronounced in FY2003. That year, tax is due in the PWC proposal - even though you make a large loss for the year. Nevertheless the total tax downpayments, spread over many years, are similar. Where the PWC system scores 'big time' is that there is no overhang of tax due that is carried forward into future years. That means the ultimate tax liability of anyone under the PWC system is likely to be much lower, because the tax downpayments due are in fact the *total* tax payments - there is no future tax waiting to be paid as under the Cullen-Dunne system.

    However, take away the overall lower tax liability. Then IMO, the PWC proposal stinks. It suffers the significant disadvantage of tax being charged even in years where large losses are made. Although the PWC system is reasonable on a cashflow basis over the business cycle, this 'reasonableness' is contingent on the taxable amount being taken from a modest 3% of portfolio value. If the government were to adopt the PWC proposal, but up the taxable amount to (say) 5% of portfolio value, it would look far less reasonable! Furthermore there is every chance the government *would* raise the taxable proportion, because the ultimate total tax payable under the PWC plan is so much less under the Cullen/Dunne legislative proposal.

    IMO the preferred way ahead (other than complete abandonment which hardly seems like a realistic option) would be to retain the Cullen/Dunne proposal but remove the 'overhang' of tax due in future years, if say the shares were held for five years or more. This would provide a similar tax income for the government to the PWC proposal. But the anomaly of having to pay large amounts of tax in a year where you made a large loss, or indeed suffered permanent loss through company bankruptcy, would be mostly removed. However, would the government be agreeable to such a large potential decrease in tax income from any new proposed scheme? I suspect not.

    The logical way to increase government tax income, should the PWC scheme be adopted, is to increase the taxable threshold from PWCs recommended 3% to (for example) 5%. That IMO would be disastrous. IMO the PWC proposal should be opposed. I think the PWC proposal is conceptually flawed, even though is has been 'dressed up' as 'OK' by using a low headline taxable capital rate of only 3%.

    SNOOPY


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  4. #24
    Senior Member Halebop's Avatar
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    Anything that takes cash flow away from a low yielding investment is flawed. Anything that skews the playing field in favour of categories or destinations is flawed. Neither proposal deserves debate. Government already know they have a loser but haven't quite worked out how to drop the smoking potato. An incoming National/Alternative Government would surely have a mandate to reverse any Cullen inspired CGT in any case.

    The focus around taxing piecemeal and incrementally seems to be to avoid the distortionary impact that a capital gains tax on sale has on investment decisions. That is: I have an asset that is worth $200, I paid $20, so will be taxed on $180 at sale, therefore that contingent liability influences my decision to continue to hold lest my wealth diminish by $50 or $60 in a single hit from IRD.

    On the other side a capital gains tax at time of sale is more affordable from a cash flow perspective. Often it's the only time many investments provide meaningful cash flow.

    An alternative would be to calculate tax at whatever effective / annual rate is thought appropriate. ...But then allow the investor the option of either paying the tax each applicable year or accruing it until asset sale time. Accrued tax could be charged compound interest at the prevailing government stock rate or another suitable "deemed" rate. This way cash flow need not be impacted but investment decisions are less influenced by relative value differentials between the asset's market value and contingent tax liability.

    Additionally, either all asset classes should be taxable or none at all. The logic and fairness of this argument should be apparent to everyone?

    Finally, a crystal clear definition on trading versus investing would be required to make any CGT proposal work.

  5. #25
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    quote:Originally posted by Halebop



    The focus around taxing piecemeal and incrementally seems to be to avoid the distortionary impact that a capital gains tax on sale has on investment decisions. That is: I have an asset that is worth $200, I paid $20, so will be taxed on $180 at sale, therefore that contingent liability influences my decision to continue to hold lest my wealth diminish by $50 or $60 in a single hit from IRD.
    If you believe the original discussion document, the whole point of this Cullen/Dunne proposal is to level the playing field between NZ and overseas investments. The main problem with NZ sharemarket investments is that we are based on an island nation about as far away from global commerce centres as it is possible to get. That means it is a big leap to go from being a sizeable player in the NZ market to expand overseas. For most NZ companies such a leap is too difficult and they satisfy themselves with being a big fish in a small pond, and getting rid of excess cash by paying high dividends.

    Thus you have the typical NZ share (Low growth, high dividend) that stacks up against all sorts of growth opportunities overseas (high growth, low or no dividend) that are only an investor's mouse click away. The aim of the Cullen/Dunne proposal is to try and make each kind of investment decision 'tax neutral'. When you want to truly level the playing field between 'high dividend and taxed' and 'high growth untaxed', the only option that I can see is to tax the high growth in some form. That means a capital gains tax. But Cullen has said no to a general capital gains tax. Thus Cullen is faced with trying to concoct some other tax that is a proxy for a capital gains tax, but can't be called a capital gains tax.

    When these proxy taxes get scrutinized in detail it becomes obvious that they really are a capital gains tax by another name and then all the bad mud starts flying. IMO Cullen has painted himself into a corner here. You can't equalise taxed dividend investment returns and untaxed capital gains without taxing capital gains which Cullen has refused to do - Catch 22.

    SNOOPY

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  6. #26
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    quote:Originally posted by Halebop


    An alternative would be to calculate tax at whatever effective / annual rate is thought appropriate. ...But then allow the investor the option of either paying the tax each applicable year or accruing it until asset sale time. Accrued tax could be charged compound interest at the prevailing government stock rate or another suitable "deemed" rate. This way cash flow need not be impacted but investment decisions are less influenced by relative value differentials between the asset's market value and contingent tax liability.
    Halebop's suggestion sounds a bit of an administrative nightmare, but actually I think it is rather a good idea. You capture the capital gains *but* you take away the cashflow nightmare of the investors tax liability. And those who do decide to pay tax up front are 'rewarded' by being able to dive out from under any penalty borrowing rates. So there is still an incentive to pay tax when you can afford it. Brilliant!

    SNOOPY

    (who while he likes the solution, is nevertheless not happy with the original problem, as he is not convinced that the 'problem' of kiwis directing too much of their savings overseas even exists.)


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  7. #27
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    quote:Originally posted by Snoopy


    The logical way to increase government tax income, should the PWC scheme be adopted, is to increase the taxable threshold from PWCs recommended 3% to (for example) 5%. That IMO would be disastrous. IMO the PWC proposal should be opposed. I think the PWC proposal is conceptually flawed, even though is has been 'dressed up' as 'OK' by using a low headline taxable capital rate of only 3%.
    Well, well, well. Cullen *has* bumped up the 'deemed dividend rate' to 5% of (opening) share value! Sorry to be so accurate with my predictions. Bad news. OTOH the wiping of tax when investors make a loss has to be good. It would be appalling if investors had to sell out at the bottom of the market because they had insufficient cashflow to pay their tax bill.

    So will my fears be confirmed, or have I just been scaremongering? Time to take up the case of Ms Investor again, under this new proposed Cullen/Dunne 'Wealth Increase Low Dividend Capital Adjusted Tax' (WILDCAT tax for short).

    SNOOPY

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  8. #28
    Senior Member Halebop's Avatar
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    quote:Originally posted by Snoopy


    Halebop's suggestion sounds a bit of an administrative nightmare, but actually I think it is rather a good idea. You capture the capital gains *but* you take away the cashflow nightmare of the investors tax liability. And those who do decide to pay tax up front are 'rewarded' by being able to dive out from under any penalty borrowing rates. So there is still an incentive to pay tax when you can afford it. Brilliant!
    No doubt about it, the thing would be an awful idea (administratively) but I was just trying to theorise a concept that would meet their challenge of taxing on the go without punishing those who don't generate an income but might ultimately generate more wealth (and tax dollars).

    Ultimately, despite the skewing effect you get by investors holding more because of tax ramifications than because of investment merits, I think a CGT at time of sale is both easiest to use (there are no calculations until you sell) and fairest to apply (when you sell you have the money to pay).

    Irrespective of what the government decide, you can count on the fact that the people they say are the ones they are trying to capture in the net will be the ones least likely caught. Why they would create this stink defies logic? The corporations who have the most to gain (NZ based fund managers) don't vote. The managers of the corporations don't vote Labour (maybe they will now?). The people who will be taxed most are those who are already taxed most. The medium sized fish caught in the net will logically do what the government has asked them and invest only in NZ Shares, Australian Shares and local real estate. (Yay macro wealth growth equation from that last one).

  9. #29
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    quote:Originally posted by Snoopy

    Time to take up the case of Ms Investor again, under this new proposed Cullen/Dunne 'Wealth Increase Low Dividend Capital Adjusted Tax' (WILDCAT tax for short).
    The ‘WILDCAT’ tax proposal is relatively simple in concept:
    The investor pays a wealth tax as a proxy for ‘fair dividends’ based on 5% of the opening value of the investment at the beginning of the current financial year. Very simple so far, but there is inherent unfairness in such extreme simplicity.

    If the actual return the sum of dividends & capital appreciation was less than 5%, then the taxpayer would pay tax on that lower actual amount ‘deemed earned’ instead. Finally no tax would be payable if the combined dividend income and capital losses are negative.

    If one must have a new tax regime for overseas shares this, on the surface, sounds reasonable. Let’s see how it would work in practice.

    Problem Part 1 (WILDCAT September 2006 proposal)

    Let's assume 'I' bought 100 shares (we'll keep everything in round numbers) in December 2000 for $US34.655 dollars per share at an exchange rate of $NZ1= US42.32c. Brokerage was $US51.99. The shares paid no dividend in the time ‘I’ held them up until 31st March 2001, at which time the share price had increased to $US38.19. Furthermore the exchange rate changed to $NZ1= US42.19c. How much tax would ‘I’ pay on these shares for FY2001?

    Using 0.05x(V-V1) where V is the value of the shares at the start of the year and V1 is the value of $NZ put into those shares during the year (in year 1 this means brokerage):

    0.05 x{($US3465.5/0.4232 - $US51.99/0.4232)}= $NZ403.30

    There is no dividend and the share valuation did go up by more than 5% during the year. So $NZ403.30 is the deemed ‘Fair Dividend Rate’. That means the tax payable, based on a 33% tax rate is:

    0.33 x $NZ403.30= $NZ133.09

    SNOOPY (to be continued)

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  10. #30
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    Problem Part 2 (WILDCAT September 2006 proposal)


    It is now the end of FY2002. ‘Yum Restaurants International’ paid no dividends during the entire year. ‘I’ didn't buy or sell any shares during the year and the share price improved to $US58.78 based on an exchange rate (at 31st March 2002) of $NZ1= US43.06c. How much tax would ‘I’ pay for FY2002?

    Using the formula for ‘Fair Dividend rate’: 0.05x(V-V1)

    0.05x($US3819/0.4219 - 0)= $NZ452.60

    Again there is no dividend paid and the shares appreciated in value by more than 5%, so the deemed ‘Fair Dividend Rate’ assessable income is $NZ452.60 by default

    Assuming a 33% tax rate, the tax payable is 0.33x $NZ452.60= $NZ149.36

    (continued)

    SNOOPY

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